Ceragon Networks Ltd (CRNT) 2004 Q1 法說會逐字稿

Good day everyone and welcome to the Ceragon Network Limited first quarter 2004 quarterly results conference call.Today's call is being recorded and will be hosted by Mr. Shraga Katz, President and Chief Executive Officer of Ceragon Network and Mr. Ran Oz, Chief Financial Officer of Ceragon Network.

Today's presentation will include forward-looking statements under the Private Securities Litigation Reform Act of 1995.These statements are subject to risks and uncertainties that could cause Ceragon's actual results to be materially different from those expressed or implied by such statements.

For additional information regarding the risks associated with Ceragon's business please refer to Ceragon's annual report on report 20-F and Ceragon's reports filed with the SEC. Web users can visit Ceragon at www.ceragon.com to read the complete forward-looking statement language. I will now turn over the meeting to Mr. Ran Oz, Chief Financial Officer. Please go ahead, sir.

Thank you for joining us for our Q1 2004 conference call. Shraga will update you on our current status and ongoing strategy.Then I will walk you through the numbers and continue with Q&A and finish up with Shraga's closing remarks.Now I will turn the meeting over to Shraga.

Thank you and good day to everyone participating in today's conference call. Earlier today we released our results for the first quarter of 2004. I am pleased to report that for the first time in Ceragon's history we have posted a profitable quarter.I am proud of our team for achieving this goal and thank everyone for their hard work.This past quarter we saw continued top line growth.

Our quarterly revenues grew for the ten consecutive quarter with revenues reaching 11.4 million, up from 10.2 million in Q4 '03 and from 7 million in Q1 '03. Our consistent strategic focus on solid market, geographic expansion and product leadership continues to prove itself.We are seeing increases in market share and revenues quarter after quarter which has been the main driver to achieving our goal of turning profitable.

Together with profitability Q1 was a strategic quarter for Ceragon as we announced an important product breakthrough in line with our longer term vision. In March we launched the newest member to our product line, the FibeAir 1500 P thereby extending our technology platform.

This significant innovation is the result of skillful engineered work and marks what we gain from the extended platform from Ceragon over the next few years.This expanded product line offers the most advanced [inaudible] and flexible high capacity wireless solutions in the market.

Announcing our advancing our competitive advantage and enabling our customers to seamlessly upgrade capacities, frequencies and network technologies. On the marketing side we again had a very successful quarter in terms of bookings and once again for the third consecutive quarter our book-to-bill was greater than one.

We are continuing to successfully expand our global footprint and worldwide presence. We are we have extended our reach in Asia Pacific and Africa and are seeing the growing demand in these regions.We are very pleased with the substantial repeat business and growing customer base in the service providers market.

We expect this market which includes both cellular and fixed operators to remain strong as we see it as having great potential going forward. In the private networks and enterprise market I can report that we are seeing both repeat business as well as new business from first tier global solutions providers.

This market continues to be a key contributor to our revenues, one of our main drivers for future growth. Our product strategy has proven itself and our product vision remains clear.To deliver the most comprehensive product in the high capacity marketplace, to extend our intelligent networking solutions and to improve our customer [inaudible].

As I said this quarter we are announced the latest addition to our expanding family of fiber products, FibeAir 1500P.This innovative and spcially efficient product offers an extraordinary combination of advantages in a single compact system. It is equipped with built in [inaudible] mechanism which enables high capacity transmission over network channels using single or dual independent carriers for enhanced spectar as well as maximum cost efficiency.

Each carrier is equipped with a software configured model allowing 16, 32, 128 and 256 QAM modulation scheme for improved spectral materialization. FibeAir 1500 P supports, protected, [inaudible] and special frequency diversity and east/west configurations in the same engineering. It also supports point-to-point, ring [inaudible] and cascaded chain topologies with full [outdoor] multiplexing ADM functionality.

The FibeAir 1500 P has built in propriety algorithms optimized for higher network capacities as in either solutions for both 3G networks as well as for backholding of Yfi and [inaudible]. Our products lead the industry allowing cellular operator to smoothly upgrade their networks as they move right into the next generation which reaches comprehensive networking solutions.

The product is being received with overwhelming enthusiasm by the market.We successfully completed field drives with the major cellular operators and are well on our way to realizing first revenues from it in Q2. We are confident that exciting FibeAir 1500P would significantly enhance our competitive position in the marketplace maintaining our place as the premiere high capacity solutions provider. We at Ceragon are now proud of this leadership position and are committed to delivering to our market the most comprehensive and well suited technology solutions as we continue to identify developing needs by focusing on our target market. Now I am pleased to turn the call over to Ran who will go into greater detail about our first profitable quarter. Ran.

Thank you, Shraga. I will start with the P&L and move on to the balance sheet. I am proud to share with you our exciting news: reaching our goal of profitability this past quarter. Revenues grew nicely for the tenth consecutive quarter reaching $11.4 million representing an increase of 62% as compared to 7 million in Q1 or 3 and of 12.1% as compared to $10.2 million in Q4 '03.

I want to point out that in this quarter again the majority of our service providers business came from existing customers, a testimony to the quality of products and services we provide.The private networks and enterprise market continues to be strong, resulting in increased market share as well as substantial repeat business.

The service providers market contributed approximately half of Ceragon's revenues this quarter with several operators accounting for close to a third of the revenue. The private networks and enterprise market generates slightly more than half of our revenue.This quarter we sold to one customer representing over 10% of our revenues, a leading worldwide system integrator in the private networks and enterprise markets. Europe Middle East and Africa accounted for approximately half of revenues.

North America for about 30 percent, and Asia Pacific and Latin America all the rest. As Shraga said the quarter was again strong in terms of bookings and our book-to-bill was greater than one. As it has been for the past ten quarters; all resulting in a growing backlog. We expect revenues in Q2 to be slightly ahead of Q1 in the range of $11.5 to $12 million. For the year as a whole we are sticking to our guidance and expect revenues to grow by 30 to 40% over 2003. We are excited by our gross margins which grew once again and continue to lead the industry. Q1 '04 gross margins reached 42.7%, up from 37% in Q1 '03 and 41.8% in Q4 '03.

This is a substantial achievrment for Ceragon with gross margins over 40 for the third consecutive quarter. We intend to maintain this leadership position with a target of low to mid-forties. While revenues have grown substantially we maintained expenses in line with our plan, all resulting in an improved bottom line.

Net income improved for the tenth consecutive quarter and we recorded a profit of $39,000 as compared to a loss of $2.1 million in Q1 '03 and to a loss of $275,000 in Q4 '03. Going forward as I've mentioned in previous calls, our long-term profitability model calls for 30 cents of net income for every additional dollar of revenue.

Moving on to the balance sheet, cash balance at the end of the first quarter was $39 million. I want to point out that the cash utilization for the quarter was essentially zero and given Ceragon's strong outlook we are looking forward to 2004 being our first year of positive cash-flow.

Days sales outstanding were 59 days better than our target of 60 to 70. In summary, revenues are consistently up. As promised the company has reached profitability and we are optimistic that our market wins will enable us to continue growing towards both our top and bottom line. Now we will open up the call to Q&A.

Thank you.The Q&A session will be conducted electronically. [Caller Instructions]. Our first question comes from Jeff [Kepal], Lehman Brothers.

Good afternoon, guys, and congratulations for reaching your first profitable quarter.The question I would have for you is, and Ran, perhaps you've addressed this to some extent what your margin fall through rate will be. But to what extent have you established a target for operating margins, either this year or potentially through the long-term margin, and how quickly do you feel like you folks will be able to get there? Thanks very much.

Okay.Thank you, Jeff. As we said we are operating the right now on a marginal assumption of a contributing to the bottom line 30 cents out of each additional dollar of revenue on the top line, setting a long-term target for margins at that point, look a little bit far away. It would probably be something that we will look at going into 2005.

Okay.Thanks very much.

Thank you.

Our next question comes from Shawn Slayton with Ferris Baker Watts.

Gentlemen, good afternoon. Nice quarter. Can you characterize your market share? You mentioned market share gains and we talked about it for this past several conference calls. But can you characterize that share gain in the two primary segments of your business, network operator and private networks? Thanks.

Okay.We can go through the different markets and in each market we see different drivers. starting on the cellular side we see drivers coming from, moving between a 1/2G and 3G. More on the European side we see a lot of activity and potential coming out of Asia Pacific and in several last quarter we enjoyed gross in the revenue coming out of there. And we are starting to head into Africa for this other drivers and what we see on the cellular side.

If we go to the other part, the private network, and enterprise market, the main drivers there are in projects mainly going through the system integrators both the local one and the worldwide no-names that are generating business for us quarter after quarter.These are the main drivers we see.

Okay.You touched on it briefly but the Asia Pacific activity, is that, it seems to me that that business is accelerating for you guys. Can you speak more specifically on a geographic basis where you see the best near term opportunity for you? Thanks.

On the Asia Pacific side we see several places where there is activity and in growing amounts but the most prominent one by far is probably India.We discussed selling into a few cellular operators two quarters ago. And we are seeing a growing demand in activity quarter after quarter. We are also penetrating into other countries in this region and we see a lot of potential going forward there.

Okay.Very good. I've asked this question of a few CEOs regarding, CEOs who are in wireless infrastructure. Is the pricing environment for your products, is it becoming more rational maybe compared to this time last year? And also are you at the stage in your business development where you are willing to walk away from business that doesn't make sense from a profitability opportunity? Thanks.

Okay. I think the second part of your question is very simple for us. As is evident by our gross margin, we are very easily walk away from deals that we don't think we are going to make our margins and we are seeing the same price pressure that we've seen before. So it's a matter of getting ourselves to compete and when we get to the right place with the right places we grow new customers and continue to grow.

So the manner in which you approach the marketplace is really not changed for you over the past year or more?

We don't see any material change.

Okay.Thanks very much, guys.

Thank you, Sean.

Our next question comes from Ehud Eisenstein of Oscar Gruss.

Hi. Good afternoon guys, congratulations on reaching profitability. I have a first question regarding the cellular part of the business. If I'm not mistaken by the end of 2003 you had roughly 30 cellular accounts while almost half of them were added during 2003. How many have you added during the first quarter? And then what would you see as a reasonable number for 2004? And then I have a follow-up question.

Hi, it's Ehud, Ran. First of all thank you and if we go back to 2003 we talked about close to 30 service providers which include both cellular and fixed line operators. And we added a couple more in this quarter and this is why we feel confident that this sector we will keep on generating revenue and gross for us into 2004.

So you basically don't want to comment about any new cellular operators you see going forward in '04?

Well, it's hard to really establish a fixed number to say that we are going to be at eight or ten or twelve but we keep on winning those at the same pace as last quarter we added a couple more to our list.

Okay.On the private network side of the business, can you give us some more color on how many system integrators you had by the end of this quarter versus, say, a year ago. And then if you can again give us some more sense what kind of system integrator? You mentioned first tier 1. If you can try to give us some more sense here. Thanks.

For the private networks we are actually addressing the government side, the utilities, the education programs, factories, banks and others. So for each segment there is another system integrator and we work with self-serving different segments in these markets. Our product which is giving solutions for private networks that use, for instance, IT technology, in their network, providing access to the internet or connecting sites for with ATM switches that again we have the relevant solution. For each segment we work with the relevant system integrator, it might be in a different geographic region different one. So we work with first tier and these other players that we collaborate with.

Okay.Thank you Shraga and congratulations again.

Thank you.

As a reminder [Caller Instructions].Our next question comes from Victor Hapert with Halpert capital.

Hi, guys.

High Victor.

Very happy to see that you are meeting the expectations, exceeding them. And you are profitable as we expected. Shraga, how [inaudible] these types of margins for the month is still not, some of the other competitors are not doing so well so how are you guys doing that? And which other customers what solutions are allowing you to benefit so much? And going forward if you can explain exactly where you are going to see growth as well.

Regarding the margins, it starts with the design of the product. It's actually, wag [inaudible] was doing in last year's real world was coming with solutions that on one hand as of functionality and saves money for the customers on one end, on the other hand we are designing the product as it would be the cost as minimum as possible.

And on the operational side, we are on the other hand we are using subcontractors on the other hand we are doing our own operation and, again we are very focused on doing efficient activity. Overall if I take all these from the design of the product to the manufacturing of the product and the competing in a different markets with our solutions in different markets. So all this together gives us the good margin.

Shraga, in going forward we see that with the competition you are not seeing any problems with maintaining these margins?

Of course there is all the time once the market is not growing very quickly there is pressure for the price and what we have to do is on one hand to come with new developments, the cost is lower than the previous one and, of course, to grow our, you can see that we are growing, we are giving more product help from the company on the same side not growing that much operations department. So overall by controlling the expenses and coming up with new products and doing the right business we will maintain this level.

Thank you very much and good luck.

Thank you, Todd.

We will go now to Todd Allen with Kenny Securities.

Hi, congratulations on a good quarter.

Thank you, Todd.

I have a question for Ran. On interest income, do you have a feel of, I think my estimates were a little higher than the quarter came in?

Well, at the current interest rate we expect interest income to run in the range of 200 or maybe a little bit above the 200,000 per quarter.

Okay.And have you provided any guidance as to EPS for either the coming quarter for the full fiscal year?

No. We have not provided guidance for EPS. We gave guidance for the revenue side and we are committed to improve the bottom line at the same time.

Okay.And one additional question on gross margins, and by the way congratulations your gross margins are far and a way the best in the industry. I think in past conversations we talked about the end goal being mid-forties and today the comment was low mid-forties. Do you think that 45% gross margins are attainable, say, by the end of 2004? And do you think that's a sustainable level going forward?

Well, it's hard to say whether we can reach the 45% this year or next year.But this is definitely a target that we are aiming at. Reaching close to 43% already is a great achievement from our point of view. And we will maintain this position and try to grow it towards the long-term target of 45%.

This is a question I will throw out to anyone, Shraga or yourself, Ran, the new 1500P, I think I understand the functionality it sounds like a paring of radios where you can handle different frequency, different throughput. Could you tell me what competition that product has? Maybe how it competes, who you see in the marketplace, who are customers that might choose the 1500 P., what else would there be out there to look at?

The 1500 P is a product, it's an additional product to the existing product line. And actually what it gives you, the ability, it's what we call intelligent network element. It's actually an element in the network. You in different networks you need different solutions. Sometime the customer wants just 155 with the ability to grow it 2 times and maybe to grow it to four times. We are giving them that solution.

They don't have to do anything in order to upgrade the capacity. Sometimes the customer wants a protected system or maybe wants to build the topology of the ring or star. You know that we are providing ATM solutions integrated ones. We are the only ones that provide it, and it helps out with the cellular operators mainly.

So it's functionalities that gives you in one unit this is the smallest in the market the ability to deal with two carriers. To do all these type of solutions. And this is something that other competitors might want to have. But I don't see so focused productivity in going so much functionality in the high capacity marketplace.

Okay.So it's this type of functionality is what a customer wants, there is no other source they can go to to find something similar?

Of course if you want functionality like what we are providing then you might use high capacity other solutions for competitors but then if you need the ATM functionality you will have to have an additional box and extended box. And then you have the issue of managing and then you will have to combine management and so on. So actually we are giving the cost-effective solution that a customer can build the solution with different ways but our solution is the most cost-effective one.

Okay. great.Thank you very much. Thank you.

Moving on we will hear from Greg Weaver with Kern Capital.

Hi, nice quarter. Todd got most of my question but follow on with the 1500 P., Can you gift a sense of how this increases your addressable opportunity here and maybe the ASP difference kind of with what you are selling now and this box?

This box is again is additional to the existing one and of course this product whenever a customer wants to upgrade the network capacity or maybe to use it in different topologies. Actually what we finds through the years that the private networks as well as the cellular networks and the telecom market, most of the time have demands that we can address with the same product line giving sometimes different interfaces or different solutions but it's the same product line.

So the 1500 P. will help us goingz forward with addressing more needs in all the markets that we are addressing today. And as it is a new product of course it's an aversive product on the cost down.

And can you give us a sense of maybe the number of people that are trialing the product?

We have completed it was important for us to complete a full field trial and here again we are providing an XP big solution that is actually providing two carriers in the same channel. It's the best [tactile efficient] solution that exists with radio, we are providing we have completed a field trial like this [inaudible] this actually gives us the ability to go into the market and to show customers that it's a [inaudible] solution and so for now we just are pushing the product through the market. In Q2 we will have revenue for this product.

So the field trial was with one carrier customer and then you are using him as your reference?

Yeah.We don't see a need for doing more. It's a working product and shippable to the market.

Okay. And, Ran , can you give us a sense what percent of your revenue were your top five customers this quarter?

The last quarter in the range of 30%.

Okay.So it's similar to the prior quarter even though you didn't have one really big one this time?

Yes.

Okay.And I guess lastly, is there any activity on wireless back haul opportunity in North America?

We have in North America, what do you mean by wireless back haul?

Cellular backhaul.

Cellular back, yeah, we have activity with infrastructure for cellular operators in North America.And it's for some time we have had activity and we are selling to this market.

So there hasn't been any change, it's been kind of insignificant for some time and you don't anticipate that changing?

It's a growing segment and, of course, we are trying to grow the segment more with our activity.

Okay.Thanks.Nice quarter.

Thank you.

And a [Caller Instructions].We will pause for a moment. That is all the time we have today for questions. I would like to turn the conference back to Shraga Katz for any additional or closing comments.

Ceregon has just completed a [inaudible] announcing our exciting extended product platform. These are indeed significant accomplishments for the Ceregon and I would like to acknowledge everyone's contributions to this success. I look forward to updating you on Ceragon's continued success in our next call. Thank you for your time today.

That does conclude today's conference call. We thank you for your participation.You may now disconnect.